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Deepawali depression unwarranted

Nothing makes Diwali sparkle more than the comforting bulge of spare cash in one’s pocket. This year there are few who could claim that privilege. Suffering in tandem are the unfortunates who catch the trickle lower downstream.

Body blows to carefree spending have taken their toll. The combined effect of the Goods and Services Tax, tighter income-tax scrutiny, tighter bank credit for dodgy debtors and the floundering land and property markets have squeezed all the surplus cash. Also, notional losses on the property and stock markets have depressed impulsive spending.

The hanging clouds are temporary

Some of the depression is unwarranted. India’s fundamentals remain sound. But we have a set of worries. The most visible is the worsening of our external account courtesy the sharp rise in oil prices in the second half of August. The global economic slowdown (except in the United States) makes enhancing exports a challenge despite the very welcome downward rationalisation of the Indian rupee against the American dollar by seven per cent since mid-August.

Rising interest rates in safe-haven America have induced a flight of foreign capital, sucking $15 billion out of the Indian equity and debt markets since April 2018. Stock market values have slid temporarily back to where they were one year ago and are 10 per cent lower than the peak reached this year on August 28. This is bad news for the 40 million investors — many of them middle class people, who invest in equity directly or via mutual funds to beat inflation and generate pension egg nests.

The excess supply in realty is expected to be absorbed only over the next year. The Reserve Bank of India (RBI) did its bit in last month’s monetary policy review by retaining the repo rate at 6.5 per cent. Surjit Bhalla, an influential economist and a member of the Prime Minister’s Economic Advisory Council, is vocal about the blunt nature of the RBI’s monetary policy which causes unnecessary pain. He points to the real repo rates (nominal 6.5 per cent, less inflation) being kept much higher than the targeted 1.25 per cent.

Uncertainty was multiplied by the meltdown of the overleveraged Infrastructure Leasing and Financial Services Ltd. The failure of the credit rating agencies to downgrade its debt in time and woozy regulation by the RBI combined to create a pall of doubt over the credit worthiness of the 11,402 NBFCs registered with the RBI with combined assets of Rs 22 trillion. Over-leveraged NBFCs which borrowed short to lend long are now selling their best assets to the banks, thus squeezing profitability and portfolio growth. Painful for these companies, but a necessary correction.

Some good news

The financial results for 983 companies (moneycontrol) provide hope. In September sales were 26 per cent higher and net profits 14 per cent higher, than in the same quarter last year. With two quarters still to go; and the RBI and the State Bank of India increasing liquidity, better corporate results by the end of the fiscal year can be anticipated.

Gifts for farmers

The government has tried to create a “feel good” mood amongst farmers. Budget 2018-19 promised a minimum support price (MSP) for farm products of cost plus 50 per cent. The new MSP for kharif crops — common paddy is 13 per cent higher than last year; pulses arhar and urad four per cent higher, moong a whopping 25 per cent higher. But farmers are not satisfied. They point to the higher cost of diesel and fertiliser unaccounted for in the MSP, which was announced in July, prior to the sharp oil price increase in mid-August. Plans are in place under the vegetables initiative, for ventilated storages, close to urban areas, for storing highly perishable tomatoes, thereby avoiding distress dumping by farmers.

Gifts for consumers

Nor have consumers been forgotten. The price of onions — a politically sensitive universal green — is stabilised through a combination of minimum export price constraints and market interventions. The retail price of fuel was moderated by the government reducing VAT by Rs 1 per litre at a cost of Rs 105 billion this year. The oil marketing companies reduced their supply price by an additional Rs 1.50 per litre.

Divine intervention from Trump and savvy moves by Modi/Abe/RBI

Some clouds have lifted. US President Donald Trump has waived the Iran sanctions for India and some other countries as they went into force earlier this week. That is helpful. We can continue to import crude from Iran in rupees. Crude prices might also soften with slower demand growth in China and other mature markets. This will be good for our external balance.

In another tactical move, the RBI sealed a currency swap agreement with Japan for $87 billion during Prime Minister Narendra Modi’s recent visit. Import in INR at a bilaterally agreed rate reduces the drain on our hard currency reserves to fund imports and effectively boosts the RBI’s foreign currency reserves of $390 billion by 22 per cent. In the short term, it builds confidence in international financial markets regarding the stability of our external account.

Low inflation is a blessing – thanks to the RBI

This is not the best of times. But nor is it the worst. Consider that inflation is less than five per cent per annum. This means fail-safe investments in post office time deposits earn a real interest of three per cent per year after deducting inflation. Economic growth is steady in real terms at around seven per cent per year, which expands the tax base. Government revenues are increasing at just under three times the rate of inflation. In October, GST realisations exceeded Rs 1 trillion for the first time. This gives hope that the much-needed public investment in infrastructure and basic services will also increase in real terms.

Laxmi is a generous Goddess : Ask with care

So, while praying to Goddess Lakshmi, be careful what you ask for. She is generous with her gifts. Will you ask for wisdom and good schooling for your children; good health and affordable healthcare facilities; clean air and water and more helpful policing, or are your wishes one-time freebies, like a stock market boom; lower home loan interest rates; lower tax rates; lower fuel prices, and so on. Choose sustainable rather than one-off immediate benefits. Anything that comes at no cost can also disappear overnight. Have a safe and joyful Diwali.

Adapted from the authors opinion piece in The Asian Age, November 6, 2018 http://www.asianage.com/opinion/columnists/071118/in-diwali-sans-sparkle-a-few-things-to-cheer.html

Published by Sanjeev Ahluwalia

Sanjeev S. Ahluwalia is currently Advisor, Observer Research Foundation, New Delhi and an independent consultant with core skills in economic regulation, institutional development, decentralization, public sector performance management and governance. He is an Honorary Member of the TERI Advisory Board and a Honorary Member of the CIRC Management Committee. He was a Senior Specialist with the Africa Poverty Reduction and Economic Management network of the World Bank for over seven years, 2005-2013. He has over a decade of experience at the national level in the Ministry of Finance, Government of India as Joint Secretary, Disinvestment from 2002 to 2005 and earlier in the Department of Economic Affairs in commercial debt management and Asian Development Bank financed projects and trade development with East Asia in the Ministry of Commerce. He was also the first Secretary of the Central Electricity Regulatory Commission from 1999 to 2000. He worked in TERI as a Senior Fellow from 1995 to 1998 in the areas of governance and regulation of the electricity sector and institutional development for renewable energy growth. Previously he served the Government of Uttar Pradesh, India in various capacities at the District and State level from 1980 onwards as a member of the Indian Administrative Service. His last job was as Secretary Finance (Expenditure management) Government of UP from 2001 to 2002. He has a Masters in Economic Policy Management from Columbia University, New York; a post graduate Diploma in Financial Management from the Faculty of Management Studies, Delhi University and a Masters in History from St. Stephens College, Delhi.
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